Capital gain from the sale of a principal residence is not subject to tax provided that the residence is a housing unit and has been occupied by the owner, the owner’s spouse, domestic partner, or children, during the years of ownership. This is called the “Principal Residence Exemption”. However, when the residence is only occupied for a short period of time, or the property was not the principle residence for a year or more prior to the sale, the capital gain must be reported to the Canada Revenue Agency (CRA). This rule is applicable to Canadian citizens, as well as non-resident taxpayers.
Recently, a non-resident taxpayer made a query to the CRA. The taxpayer owned a condominium in Canada, which was occupied on occasion by the taxpayer’s children. The taxpayer wanted to know if the principal residence exemption was applicable.
AG Tax analysts have prepared a brief summary of the CRA response:
CRA Response to Taxpayer Query Regarding Principal Residence Exemption
The CRA informed the taxpayer that, in order to qualify for the principal residence exemption, the following conditions must be fulfilled:
• Ownership: The taxpayer must be the legal owner of the residence.
• Ordinarily-Inhabited Rule: The house should be inhabited by a current or former spouse/ domestic partner or child(ren) of whom the seller (taxpayer) or his/her spouse or domestic partner is the legal parent and he/she is dependent on the taxpayer.
• Resident Status: The principal residence exemption can only be applied in the tax years during which the taxpayer was a Canadian resident. This includes the time of acquisition and the time period that the taxpayer’s children occupied the condominium.
The CRA informed the taxpayer that the condominium did qualify as the principal residence for the tax years during which all of the required conditions were fulfilled.
The requirements for principal residence exemption are rigid and complex. However, through proper tax planning, many Canadian citizens and non-resident taxpayers can qualify for the exemption. In order to minimize reporting errors, and maximize the possibility of qualifying for the exemption, consultation with tax professionals is highly advisable.
AG Tax LLP can help
If you have any tax queries pertaining to property, or require assistance with tax planning or tax filings, please contact AG Tax. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
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